On Supply Chain Coordination With Price-Quality Dependent Demand

Firms begin to focus on both price and quality as competition become fiercer.However, price and quality decisions are often made from different sources within asupply chain, which makes supply chain performance relatively low as each party aims tomaximize his own profit.This paper studies a supply chain composed by a manufacturer and a retailer, whichsatisfies a price-quality dependent demand for a single product in a single period. Themanufacturer determines the quality level, while the retail price depends on the retailer.External quality cost is taken into account as well as an exogenous mandatory qualitythreshold. First, a centralized supply chain model and a manufacturer–led Stackelberggame model are developed and solved. We found that the optimal quality and price of thedecentralized situation is both higher than that of the integrated model. Then impacts of aquality cost sharing contract and a revenue sharing contract on the supply chainperformance and price-quality equilibrium are compared. We show that only when thecost-sharing ratio is less than a threshold can a cost-sharing contract improve the supplychain performance; when both sides share revenue, although the optimal quality level islower, there still exists proper contract parameters which make the supply chainperformance better off. The numerical study also shows that a revenue sharing contractcan improve supply chain performance significantly, and a win-win situation can beachieved between the2sides. Instead, the supply chain cannot be coordinated by a qualitycost sharing contract. We finally derive some management insights; including higherquality is not always optimal for products that satisfy those specified conditions in oursettings, the importance of quality regulation etc.